Archive for the ‘Big Government’ Category

I’ve narrated a video on why big government is theoretically bad for an economy, another video looking at the empirical evidence on government spending and economic performance, and also a video on the growth-maximizing size of the public sector.

But if you want to see a lot of what I said condensed into one video, here’s Dennis Prager talking about differences in how the left and right view government. The opening part of the video is interesting, though I suspect his descriptions only apply to philosophically motivated activists on each side.

The part I want to focus on begins about 1:15, when he outlines seven adverse consequences of ever-growing government.

I think he put together a very good list. Here’s my two cents on his seven points.

  1. More Corruption – He points out that a government with lots of power and control will be very susceptible to misbehavior as interest groups and politicians figure out ways of scamming the system. Very similar to the message in one of my videos.
  2. Less Liberty – It is basically a tautology that ever-larger government necessitates a reduction in liberty. Not in a totalitarian sense, but taxes and regulations constrain the freedom of individual to earn and control income.
  3. Fiscal Crisis – He warns that big government is a recipe for fiscal crisis. I’m not sure if this has to be inevitable, but from a practical perspective, he is right. Demographic change and entitlements are a poisonous combination.
  4. Punitive Taxation – If government consistently expands faster than the productive sector of the economy, that almost certainly means ever-higher taxes, which ultimately will be self defeating because of the Laffer Curve.
  5. Unsustainable Debt – An expanding burden of government spending also will mean ever-higher levels of red ink, especially once the tax burden is so high that additional levies don’t produce much – if any – revenue.
  6. Totalitarianism – This is probably Prager’s weakest point. He’s right that bad people do very bad things when they control a government, but I suspect western nations will suffer societal breakdown rather that dictatorship.
  7. Dependency – He closes very strong with observations about the danger of luring people into reliance on government. This concern about the erosion of societal capital is much more important than most people think.

For all intents and purposes, Prager’s video is a very good description of “goldfish government.”

This is the term I use to describe the unfortunate tendency of politicians to over-tax and over-spend until a society faces a crisis.

For what it’s worth, I don’t think western nations necessarily will collapse (though some almost certainly will depending on the degree to which societal capital has been destroyed).

But I will acknowledge that politicians generally don’t like taking the necessary steps to avert fiscal crisis.

Which is one of the reasons I’m such a big fan of tax competition. I don’t want politicians to think that endless tax increases are a way of postponing the fiscal day of reckoning.

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Every time I write a column criticizing Trump’s protectionism, I get pushback. Some of the resistance is from people who genuinely think trade barriers are a good thing, and I routinely respond by asking them to ponder these eight questions or these five charts.

But I also get negative feedback from people who point out that the United States imposed significant import taxes in the 1800s, a period when the United States transitioned from agricultural poverty to middle-class prosperity.

Doesn’t this prove tariffs are pro-growth?

That’s sort of what Brian Domitrovic asserts in a recent column for Forbes.

There is an indisputable chronological correlation between the tariff and phenomenal economic growth. From the late 18th to the early 20th twentieth centuries, the United States steadily developed into the most successful economy in the world.

Brian’s column explores how trade taxes worked in the early history of the United States, but let’s skip to the part that is relevant to today’s discussion.

From 1789 to 1913, the size of the federal government in the economy as a whole averaged about 3%, with variation in time of war. Today, that number is over 20%—a 7-fold increase. State and local government was another 3% back then, and is another 12% today. Where total government was 6% of economic output in the era of the tariff, it is five times larger at over 30% today.

In other words, the real lesson to be learned is not that trade taxes are good for growth, but rather that an economy can prosper if the public sector is very small. And Brian is right that the federal government used to be only a tiny burden in the United States.

Brian even makes the case that government may have stayed small during the 1800s precisely because import taxes were seen as naked cronyism.

The quid pro quo the populace made with the tariff is that Congress and its conspirators in business got their favors, but in turn Congress’s realm, the government, had to stay small. Therefore, the private economy was free… Boundless growth at the hands of entrepreneurs and a talented and ambitious workforce built up year after year as Congress got to curry its petty favors on the condition that government stayed limited in size.

He also explains that politicians back then were very cognizant of the Laffer Curve.

A tariff “for revenue” was one where a rate was set low enough for the good in question to flow into the country in sufficient quantity to bring in increasing receipts to the government. A “prohibitive” tariff was one that was so high, receipts would go up if a rate were lowered. The “Laffer curve” concept was the most discussed theorem in political-economic debates in the United States in the 19th century.

The same principle applies to the income tax today. A modest rate generates lots of revenue, whereas a punitive rate can actually cause a drop in tax receipts.

And, speaking of the income tax, the introduction of that awful levy actually gave Hoover and other politicians the fiscal leeway to impose “prohibitive” tariffs…with very bad results.

After the income tax was put in place in 1913, the tariff shed its revenue purpose and became exclusively a vehicle for cronyism. Therefore it got very high—so high, in 1930, that…the…system was ruined and the result was the Great Depression.

For what it’s worth, I think there were lots of other bad policies from Hoover and Roosevelt that caused – and then exacerbated – the economic damage of the 1930s, so high tariffs don’t deserve all the blame.

But let’s not digress from our main topic of whether trade taxes can be justified.

Brian’s column doesn’t say that tariffs are good, but he does point out that such a system was only capable of financing a very small government. And that meant the private sector had lots of breathing room to operate.

But a “sin of omission” is that he also could have elaborated on the economic benefits of having no income tax. During the 1800s (with the exception of Lincoln’s income tax during the Civil War and an income tax in 1894 that was declared unconstitutional in 1895), there was no personal income tax. And no corporate income tax. And no payroll taxes. Or death tax. Or capital gains tax.

Dean Clancy highlighted these benefits when considering the conditions that would be necessary for him to support trade taxes.

I sort of agree. But I hope Dean would agree to a friendly tweak to his tweet, so that it read “McKinley-size tariffs were a less-worse option because of…”, and then list the polices that actually were good, such as no taxes on income and very small government.

Sadly, I don’t see any practical way of unwinding all the bad policy of the past 100 years.

So the case for trade taxes is very similar to the market-friendly case for a value-added tax. Yes, there is a theoretical argument to replace all income taxes with a VAT, but it’s not realistic.

Likewise, I’m open to the argument that higher tariffs might be acceptable, but only if someone first shows me a practical plan to 1) shrink the federal government back down to what the Founding Fathers envisioned, and 2) get rid of the IRS and all taxes on income.

P.S. Alexander Hamilton, writing about tariffs and excises in Federalist 21, clearly appreciated the insights of the Laffer Curve: “It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue.”

P.P.S. The Cayman Islands is the closest example of a successful modern economy that finances a big chunk of government with import taxes. But that example is somewhat limited since almost all goods are imported. For such an economy, tariffs are basically the same as a sales tax. For what it’s worth, I would argue Cayman’s fiscal system has more in common with Monaco today than with the United States in the 1800s.

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Writing about federal spending last week, I shared five charts illustrating how the process works and what’s causing America’s fiscal problems.

Most important, I showed that the ever-increasing burden of federal spending is almost entirely the result of domestic spending increasing much faster than what would be needed to keep pace with inflation.

And when I further sliced and diced the numbers, I showed that outlays for entitlements (programs such as Social SecurityMedicareMedicaid, and Obamacare) were the real problem.

Let’s elaborate.

John Cogan, writing for the Wall Street Journal, summarizes our current predicament.

Since the end of World War II, federal tax revenue has grown 15% faster than national income—while federal spending has grown 50% faster. …all—yes, all—of the increase in federal spending relative to GDP over the past seven decades is attributable to entitlement spending. Since the late 1940s, entitlement claims on the nation’s output of goods and services have risen from less than 4% to 14%. …If you’re seeking the reason for the federal government’s chronic budget deficits and crushing national debt, look no further than entitlement programs. …entitlement spending accounts for nearly two-thirds of federal spending. …What about the future? Social Security and Medicare expenditures are accelerating now that baby boomers have begun to collect their government-financed retirement and health-care benefits. If left unchecked, these programs will push government spending to levels never seen during peacetime. Financing this spending will require either record levels of taxation or debt.

Here’s a chart from his column. Only instead of looking at inflation-adjusted growth of past spending, he looks at what will happen to future entitlement spending, measured as a share of economic output.

And he concludes with a very dismal point.

…restraint is not possible without presidential leadership. Unfortunately, President Trump has failed to step up.

I largely agree. Trump has nominally endorsed some reforms, but the White House hasn’t expended the slightest bit of effort to fix any of the entitlement programs.

Now let’s see what another expert has to say on the topic. Brian Riedl of the Manhattan Institute paints a rather gloomy picture in an article for National Review.

…the $82 trillion avalanche of Social Security and Medicare deficits that will come over the next three decades elicits a collective shrug. Future historians — and taxpayers — are unlikely to forgive our casual indifference to what has been called “the most predictable economic crisis in history.” …Between 2008 and 2030, 74 million Americans born between 1946 and 1964 — or 10,000 per day — will retire into Social Security and Medicare. And despite trust-fund accounting games, all spending will be financed by current taxpayers. That was all right in 1960, when five workers supported each retiree. The ratio has since fallen below three-to-one today, on its way to two-to-one by the 2030s. …These demographic challenges are worsened by rising health-care costs and repeated benefit expansions from Congress. Today’s typical retiring couple has paid $140,000 into Medicare and will receive $420,000 in benefits (in net present value)… Most Social Security recipients also come out ahead. In other words, seniors are not merely getting back what they paid in. …the spending avalanche has already begun. Since 2008 — when the first Baby Boomers qualified for early retirement — Social Security and Medicare have accounted for 72 percent of all inflation-adjusted federal-spending growth (with other health entitlements responsible for the rest). …

Brian speculates on what will happen if politicians kick the can down the road.

…something has to give. Will it be responsible policy changes now, or a Greek-style crisis of debt and taxes later? …Restructuring cannot wait. Every year of delay sees 4 million more Baby Boomers retire and get locked into benefits that will be difficult to alter… Unless Washington reins in Social Security and Medicare, no tax cuts can be sustained over the long run. Ultimately, the math always wins. …Frédéric Bastiat long ago observed that “government is the great fiction through which everybody endeavors to live at the expense of everybody else.” Reality will soon fall like an anvil on Generation X and Millennials, as they find themselves on the wrong side of the largest intergenerational wealth transfer in world history.

Not exactly a cause for optimism!

Last but not least, Charles Hughes writes on the looming entitlement crisis for E21.

Medicare and Social Security already account for roughly two-fifths of all federal outlays, and they will account for a growing share of the federal budget over the coming decade. …Entitlement spending growth is a major reason that budget deficits are projected to surge over the next decade. …The unsustainable nature of these programs face mean that some reforms will have to be implemented: the only questions are when and what kind of changes will be made. The longer these reforms are put off, the inevitable changes will by necessity be larger and more abrupt. …Without real reform, the important task of placing entitlement programs back on a sustainable trajectory will be left for later generations—at which point the country will be farther down this unsustainable path.

By the way, it’s not just libertarians and conservatives who recognize there is a problem.

There have been several proposals from centrists and bipartisan groups to address the problem, such as the Simpson-Bowles plan, the Debt Reduction Task Force, and Obama’s Fiscal Commission.

For what it’s worth, I’m not a big fan of these initiatives since they include big tax increases. And oftentimes, they even propose the wrong kind of entitlement reform.

Heck, even folks on the left recognize there’s a problem. Paul Krugman correctly notes that America is facing a massive demographic shift that will lead to much higher levels of spending. And he admits that entitlement spending is driving the budget further into the red. That’s a welcome acknowledgement of reality.

Sadly, he concludes that we should somehow fix this spending problem with tax hikes.

That hasn’t worked for Europe, though, so it’s silly to think that same tax-and-spend approach will work for the United States.

I’ll close by also offering some friendly criticism of conservatives and libertarians. If you read what Cogan, Riedl, and Hughes wrote, they all stated that entitlement programs were a problem in part because they would produce rising levels of red ink.

It’s certainly true that deficits and debt will increase in the absence of genuine entitlement reform, but what irks me about this rhetoric is that a focus on red ink might lead some people to conclude that rising levels of entitlements somehow wouldn’t be a problem if matched by big tax hikes.

Wrong. Tax-financed spending diverts resources from the private economy, just as debt-financed spending diverts resources from the private economy.

In other words, the real problem is spending, not how it’s financed.

I’m almost tempted to give all of them the Bob Dole Award.

P.S. For more on America’s built-in entitlement crisis, click here, here, here, and here.

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I write constantly (some would say incessantly and annoyingly) about entitlement spending. And I occasionally write about discretionary spending.

It’s time to address the budget in a comprehensive fashion. Let’s look at five charts to put everything in context and to show how we got into our current mess.

Our first chart (based on Table 8.2 from the Office of Management and Budget’s Historical Tables) shows what has happened to major spending categories from 1962 to 2017. And all the data is in inflation-adjusted dollars (2009 benchmark) to accurately gauge how and why the burden of federal spending has grown.

This next chart shows the actual percentage increases in the major spending categories during this time period. The two big takeaways are that 1) the defense budget is not the cause of our long-run fiscal problems (though that doesn’t mean it should be exempt from cuts), and 2) entitlement expenditures have exploded.

And if you look at the data I shared from the Congressional Budget Office’s long-run forecast, you would see that these same trends will prevail for the next three decades.

In other words, our fiscal problems start with entitlements and end with entitlements.

If you want to look at the problem with a broader lens, this next chart shows that the problem is domestic spending (i.e., the combination of entitlement and domestic discretionary outlays).

If you’re pressed for time, you can stop reading now. You have the key information already.

But if you want to get a bit wonky, here are two other charts that help explain the intricacies of how budgets work (or don’t work!) in Washington.

The first thing to realize is that there are two budget processes in Washington. There are entitlement programs, which basically operate on autopilot. For all intents and purposes, the President and Congress could go on vacation for the next three years and programs such as Social Security, Medicare, Medicaid, and Obamacare would mechanically continue. But there is also “discretionary” spending for the Pentagon and various domestic programs, all of which is determined through an annual “appropriations” process. Whenever you read about a government shutdown, it’s because politicians can’t agree on the level of funding for the discretionary part of the budget.

Now let’s get to my favorite part, which is figuring out how to limit the size of the federal leviathan.

This last chart shows that net interest spending is genuinely untouchable (unless one wants a Greek-style or Argentine-style default). The rest of the budget, however, can be addressed. Entitlements can be changed through “reconciliation”, which is a legislative process designed to minimize procedural roadblocks (in general, tax bills also use reconciliation legislation). And discretionary programs can be changed via annual appropriations legislation.

I should add that net interest may not be directly touchable, but interest payments can be reduced by controlling spending and thus reducing red ink.

Another thing to understand is that the budget caps (yes, the ones that were weakened in 2013, 2015, and earlier this year) only apply to discretionary spending.

And the most important thing to realize is that the only solution to our budget mess is genuine entitlement reform. Which is why we need constitutional (and comprehensive) limits on total outlays. Politicians will only do what’s right if every other option is off the table.

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I sometimes sardonically comment about Democratic politicians playing Santa Claus, but Republicans can play that game as well.

Trump and his allies in Congress recently agreed on a big-spending budget deal that lavishes more money on both the Pentagon and domestic programs, and that was only a few weeks after agreeing on a tax reform plan that lower taxes (though only for nine years).

Even if I like part of what’s been happening, that kind of populist approach at some point becomes unsustainable. And when the D.C. swamp ultimately has to choose between lower taxes or higher spending, they’ll go with the latter and make things even worse by jacking up the tax burden.

My frustration is apparent in this recent interview.

And I’m not the only one who sees the long-run dangers.

In a column for the Wall Street Journal, Professor Edward Lazear of Stanford explores the economic damage of ever-expanding government.

The budget deal President Trump signed earlier this month will send federal spending and the deficit skyrocketing. On top of this spending explosion, the administration now plans to add a $500 billion infrastructure bill. …over time high spending necessitates high taxes, and high taxes reduce work and restrain growth. Economic trends in developed nations consistently show that low taxes and hard work are linked to robust growth.

He looks at some of the cross-country evidence.

European countries trail the U.S. in working hard and controlling taxes, and their economies have lagged in comparison. France has a tax-to-GDP ratio of about 44%, and in Italy it’s 43%. The French and Italians work almost 30% fewer hours per person than Americans. Notably, the French economy has flatlined since 2010 while Italy’s has contracted. …Data from the Organization for Economic Cooperation and Development suggests that a 1% increase in a nation’s tax rate is associated with a 1.4% decrease in hours worked per person in the working-age population.

Here’s the part that resonated with me. It’s excessive spending that ultimately is the problem.

…taxes are ultimately dictated by spending. Countries can borrow to finance short-run spending, but they must eventually levy taxes to repay the loans. Whether a government raises taxes now or later to pay for expenditures is a minor consideration compared with its decision to spend in the first place. …Higher spending goes hand in hand with higher taxes, higher deficits, fewer worked hours and less growth. The international comparisons suggest that a 4% increase in spending is associated with a decrease of roughly 0.5 percentage point in the average annual growth rate. Furthermore, it is spending—rather than the deficit—that correlates with sluggish growth. …Deficits often coincide with low growth because deficit increases are usually caused by heightened spending, not reduced taxes. Raising taxes, or keeping them high without lowering spending, stifles growth.

Heck, even the OECD has produced research on the negative impact of government spending on economic performance.

And this approach can lead to a downward spiral.

To the extent that government spending goes to programs such as welfare that directly discourage work, it has an additional growth-reducing effect. When fewer people work, those who do must be taxed even more to cover public expenses. These heightened taxes on labor discourage work in turn, pushing more potential workers toward government support.

In other words, if we stay on this path, we’ll eventually become Greece. Not a good idea, to put it mildly.

Since we’re on the topic, let’s look at some additional evidence. Three economists from Australia and the United Kingdom did a meta-analysis of studies on the relationship between government spending and economic growth. Here are some of the findings.

One of the most contentious issues in economics is whether ‘big government’ is good or bad for economic growth. …Theoretically, big government can have both negative and positive effects on growth. …In this study, we include all effect-size estimates reported by empirical studies that examine the direct effect of government size on growth.

Here’s what they found.

… findings indicate that: (i) total government expenditures have a medium and adverse effect on per-capita income growth in developed countries only; (ii) the effect of government consumption on per-capita income growth is also medium in developed countries and in developed and LDCs pooled together; and (iii) neither total expenditures nor government consumption has a significant effect on per-capita income growth in LDCs.

I’m not surprised that they didn’t find a strong link in poor nations. The data show that those countries are generally too mismanaged and corrupt to collect much revenue. Therefore, as I noted in my recent analysis of Indian economic policy, they can’t spend much.

What’s primarily holding back those countries is weak rule of law, excessive regulation, and protectionism.

But I’m digressing. The study also acknowledges the Rahn Curve, though they call it the Armey Curve.

…government size tends to have a negative effect on per-capita income growth as the level of income increases. This finding ties in with the Armey curve hypothesis (Armey, 1995), which posits an inverted-U relationship between government size and economic growth. The theoretical argument here is that government size may be characterised by decreasing returns. Another theoretical argument relates to the distortionary nature of taxes, which is minimal for low levels of taxation, but beyond a certain threshold, they grow rapidly and become extremely large.

Quite true.

Sadly, some people mistakenly conclude that if a little bit of government is associated with more prosperity, then a bloated public sector must be even better.

On a related note, Professor Alexander Salter dismisses the assertion (pushed by international bureaucracies) that big government is a pre-condition for prosperity. Here’s some of what he wrote.

Why are Western countries like the United States and Germany so much richer today than other countries around the world? …One explanation for the success of the West is, in a word, liberty. Over the last few hundred years, classical liberal ideas such as the rights of man and the rule of lawput constraints on European governments’ power, which resulted in a strong protection of private property rights. This resulted in meteoric economic growth, which delivered the modern cornucopia of wealth. …Free countries get rich; unfree countries stay poor.

But there’s a competing theory.

…another explanation — state capacity…is the idea that economic development requires strong, centralized states to uphold the rule of law and provide crucial public goods. …The state capacity literature in economics…places heavy emphasis on a single, strong, central legal authority. In this framework, the fractured and decentralized legal authorities in medieval and early modern Europe are now seen as antithetical to economic development.

Salter is skeptical of the second theory.

…it is undeniable that economic growth in the West did not take off until the rise of modern nation-states. … While governance institutions obviously began centralizing at the beginning of the modern era, …that’s insufficient as a causal explanation. …the state capacity literature has a hard time dealing with a very troubling counterexample: the totalitarian states of the 20th century: like the USSR and China. These states had plenty of capacity, as evidenced by their ability to murder millions of their own citizens… Needless to say, these kinds of things aren’t conducive to economic development.

So he concludes that the first theory must be the answer, at least in part.

…whatever is “doing the work” of promoting economic growth, it is upstream of the creation of states. …State capacity may or may not be a valuable steppingstone to an explanation, but it is not itself an explanation that social scientists should accept. …it seems the old hypothesis — that the big ideas of classical liberalism created Western economic growth — is worth another look!

My bottom line, for what it’s worth, is that the classical-liberalism approach is the necessary condition, but that doesn’t automatically make it a sufficient condition.

In a column last year on the emerging micro-state of Liberland, I tried to square the circle. Here’s some of what I wrote after looking at the literature on state capacity.

…the key to prosperity is having a state strong enough and effective enough to provide rule of law, but to somehow constrain that state so that it doesn’t venture into destructive redistribution policies. This is why competition between governments played a key role in the economic development of the western world. When governments have to worry about productive resources escaping, that forces them to focus on things that help an economy (i.e., rule of law) while minimizing the policies that hinder prosperity (i.e., high taxes and spending). …America’s Founding Fathers dealt with the same issues… Their solution was a constitution that explicitly limited the size and scope of the federal government. …that system worked reasonably well until the 1930s.

I find this issue fascinating, but I suspect most people are more concerned about the real-world consequences rather than the theoretical underpinnings.

So I’ll end on a pessimistic note by observing that we normally get bad fiscal policy from Democrats and worse fiscal policy from Republicans (Reagan being the only modern-era exception).

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In 2016, here’s some of what I wrote about the economic outlook in Illinois.

There’s a somewhat famous quote from Adam Smith (“there is a great deal of ruin in a nation“) about the ability of a country to survive and withstand lots of bad public policy. I’ve tried to get across the same point by explaining that you don’t need perfect policy, or even good policy. A nation can enjoy a bit of growth so long as policy is merely adequate. Just give the private sector some “breathing room,” I’ve argued.

I subsequently pointed out that politicians in Illinois were doing their best to suffocate the private sector, and also warned that a tax hike would push the state even closer to a day of reckoning.

Let’s apply this same analysis to California.

So here are some excerpts from a column I wrote about the Golden State in 2016

Something doesn’t add up. People like me have been explaining that California is an example of policies to avoid. Depending on my mood, I’ll refer to the state as the France, Italy, or Greece of the United States. But folks on the left are making the opposite argument. … statists…do have a semi-accurate point. There are some statistics showing that California has out-performed many other states over the past couple of years. … California may have enjoyed some decent growth in recent years as it got a bit of a bounce from its deep recession, but it appears that the benefits of that growth have mostly gone to the Hollywood crowd and the Silicon Valley folks. I guess this is the left-wing version of “trickle down” economics.

So what’s happened in California since I wrote that article?

Well, lots of California-type policies.

And where does that leave the state? Is California heading in the wrong direction faster or slower than Illinois?

Victor Davis Hanson’s column in Investor’s Business Daily has a grim assessment. He explains that California residents pay a lot for lousy government.

Some 62% of state roads have been rated poor or mediocre. There were more predictions of huge cost overruns and yearly losses on high-speed rail — before the first mile of track has been laid. One-third of Bay Area residents were polled as hoping to leave the area soon. Such pessimism is daily fare, and for good reason. The basket of California state taxes — sales, income and gasoline — rates among the highest in the U.S. Yet California roads and K-12 education rank near the bottom. …One in three American welfare recipients resides in California. Almost a quarter of the state population lives below or near the poverty line. Yet the state’s gas and electricity prices are among the nation’s highest. One in four state residents was not born in the U.S. Current state-funded pension programs are not sustainable. California depends on a tiny elite class for about half of its income tax revenue. Yet many of these wealthy taxpayers are fleeing the 40-million-person state, angry over paying 12% of their income for lousy public services.

In effect, statist policies have created two states, one for the rich and the other for the poor.

…two antithetical Californias. One is an elite, out-of-touch caste along the fashionable Pacific Ocean corridor that runs the state and has the money to escape the real-life consequences of its own unworkable agendas. The other is a huge underclass in central, rural and foothill California that cannot flee to the coast and suffers the bulk of the fallout from Byzantine state regulations, poor schools and the failure to assimilate recent immigrants from some of the poorest areas in the world. The result is Connecticut and Alabama combined in one state.

Jonah Goldberg is not quite as pessimistic. He opines that the state has certain natural advantages that help it survive bad policy.

California attracts an enormous number of rich people who think it’s worth the high taxes, awful traffic, and even the threat of tectonic annihilation to live there — for reasons that literally have nothing to do with the state’s liberal policies. Indeed, most of the Californians I know live there despite those policies, not because of them. No offense to South Dakota, but if it adopted the California model of heavy regulation, high taxes, and politically correct social engineering, there’d be a caravan of refugees heading to states such as Wyoming and Minnesota. …Wealthy liberal Californians can be quite smug about how they can afford their strict land-use policies, draconian environmental regulations, and high taxes. And wealthy Californians can afford them — but poor Californians are paying the price.

Regarding the state’s outlook, I’m probably in the middle. Goldberg is right that California is a wonderful place to live, at least if you have plenty of money. But Hanson is right about the deteriorating quality of life for the non-rich.

Which may explain why a lot of ordinary people are packing up and leaving.

A columnist from the northern part of the state writes about the exodus of the middle class.

The number of people packing up and moving out of the Bay Area just hit its highest level in more than a decade. …Operators of a San Jose U-Haul business say one of their biggest problems is getting its rental moving vans back because so many are on a one-way ticket out of town. …Nationwide, the cities with the highest inflows, according to Redfin are Phoenix, Las Vegas, Atlanta, and Nashville.

And a columnist from the southern part of the state also is concerned about the middle-class exodus.

All around you, young and old alike are saying goodbye to California. …2016 census figures showed an uptick in the number of people who fled…the state altogether. …Las Vegas is one of the most popular destinations for those who leave California. It’s close, it’s a job center, and the cost of living is much cheaper, with plenty of brand-new houses going for between $200,000 and $300,000. …”There’s no corporate income tax, no personal income tax…and the regulatory environment is much easier to work with,” said Peterson. …Nevada’s gain, our loss.

What could immediately cripple state finances, though, is out-migration by the state’s sliver of rich taxpayers. Especially now that there’s a limit on how much the federal tax system subsidizes California’s profligacy.

Here are some worrisome numbers, as reported by the Sacramento Bee.

Will high taxes lead the state’s wealthiest residents to flee the Golden State for the comparable tax havens of Florida, Nevada and Texas? Republicans reliably raise that alarm when Democrats advocate for tax increases, like the 2012 and 2016 ballot initiatives that levied a new income tax on very high-earning residents. But now, with the federal tax bill cutting off deductions that benefited well-off Californians, the state’s Democrats suddenly are singing the GOP song about a potential millionaire exodus. …Democratic state lawmakers are worried because California relies so heavily on the income taxes it collects from high earners to fund government services. The state’s wealthiest 1 percent, for instance, pay 48 percent of its income tax, and the departure of just a few families could lead to a noticeable hit to state general fund revenue. …Among high-income brackets, about 38 percent of Californians who earn more than $877,560 – the top 1 percent – would see a tax hike. About 25 percent of Californians earning between $130,820 and $304,630, also would see a tax increase… “The new tax law is kind of like icing on the cake for some who were thinking about moving out of the state,” said Fiona Ma, a Democrat on the tax-collecting Board of Equalization who is running for state treasurer. …Joseph Vranich, who leads an Orange County business that advises people on where to locate their businesses, called the tax law “one more nail in the coffin” that would cause small- and middle-size entrepreneurs to leave California.

Politicians and tax collectors get resentful when the sheep move away so they no longer can be fleeced.

This powerful video from Reason should be widely shared. Thankfully it has a (mostly) happy ending.

One of the reasons the state has awful tax policy is that interest groups have stranglehold on the political system. And that leads to ever-higher levels of spending.

Writing for Forbes, for example, Josh Archambault examines the surge of Medicaid spending in the state.

Over the past ten years, Medicaid spending in California has almost tripled, growing from $37 billion per year to a whopping $103 billion per year—including both state and federal funding. And things have only accelerated since the state expanded Medicaid to a new group of able-bodied adults. …nearly 4 million able-bodied adults are now collecting Medicaid, which was once considered a last-resort safety net for poor children, seniors, and individuals with disabilities. …California initially predicted that its ObamaCare expansion would cost roughly $11.6 billion in the first three fiscal years of the program. The actual cost during that time? An astounding $43.7 billion. …Though California represents only 12 percent of the total U.S. population, it receives more than 30 percent of all Medicaid expansion spending.

And the Orange County Register recently opined about the ever-escalating expenses for a gilded class of state bureaucrats.

California’s annual state payroll grew by 6 percent in 2017, an increase of $1 billion and twice the rate of growth of the previous year. …Employee compensation is one of the largest components of the General Fund budget. In 2015-16, salaries and benefits accounted for about 12 percent of expenditures from the General Fund, a total of over $13 billion. …pay increases drive up pension costs. …The administration estimated that the annual cost to the state for the pay raises would be $2 billion by 2020-21, but the LAO said that didn’t take into account the higher overtime costs that would result from higher base pay, or the extra pension costs from that overtime. …if an economic downturn caused state revenues to decline, taxpayers would still have to pay the high and rising salaries for the full length of the contract.

The last sentence is key. I’ve previously pointed out that California has a very unstable boom-bust fiscal cycle. The state looks like it’s in good shape right now, but it’s going to blow up when the next recession hits.

Let’s close by acknowledging that poor residents also pay a harsh price.

Kerry Jackson’s article in National Review is rather depressing.

California — not Mississippi, New Mexico, or West Virginia — has the highest poverty rate in the United States. According to the Census Bureau’s Supplemental Poverty Measure — which accounts for the cost of housing, food, utilities, and clothing, and which includes non-cash government assistance as a form of income — nearly one out of four Californians is poor. …the question arises as to why California has so many poor people… It’s not as if California policymakers have neglected to wage war on poverty. Sacramento and local governments have spent massive amounts in the cause, for decades now. Myriad state and municipal benefit programs overlap with one another; in some cases, individuals with incomes 200 percent above the poverty line receive benefits, according to the California Policy Center. California state and local governments spent nearly $958 billion from 1992 through 2015 on public welfare programs.

That’s probably a partial answer to the question. There’s a lot of poverty in the state because politicians subsidize idleness. In effect, poor people get trapped.

The author agrees.

…welfare reform passed California by, leaving a dependency trap in place. Immigrants are falling into it: Fifty-five percent of immigrant families in the state get some kind of means-tested benefits… Self-interest in the social-services community may be at work here. If California’s poverty rate should ever be substantially reduced by getting the typical welfare client back into the work force, many bureaucrats could lose their jobs. …With 883,000 full-time-equivalent state and local employees in 2014, according to Governing, California has an enormous bureaucracy — a unionized, public-sector work force that exercises tremendous power through voting and lobbying. Many work in social services. …With a permanent majority in the state senate and the assembly, a prolonged dominance in the executive branch, and a weak opposition, California Democrats have long been free to indulge blue-state ideology.

And one consequences of California’s anti-market ideology is that poor people are falling further and further behind.

P.S. If Golden State leftists really do convince their neighbors to secede, I suspect the country would benefit and the state would suffer.

P.P.S. And if California actually chooses to move forward with secession, the good news is that we already have a template (albeit satirical) for a national divorce in the United States.

P.P.P.S. Closing with some California-specific humor, this Chuck Asay cartoon speculates on how future archaeologists will view the state. This Michael Ramirez cartoon looks at the impact of the state’s class-warfare tax policy. And this joke about Texas, California, and a coyote is among my most-viewed blog posts.

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Since I called Trump a big-government Republican during the 2016 campaign and just condemned his capitulation to a spendaholic budget deal, it goes without saying that I’m not a huge fan of the President.

Heck, I also recently criticized his protectionism, warning that additional barriers to trade could offset the pro-growth effect of lower tax rates.

But I like to think I’m fair in my criticisms. I stay away from the personal stuff (other than for humor purposes) and and simply focus on whether liberty is increasing or decreasing.

Today, though, I want to quasi-defend Trump because a professor from the University of Richmond wrote a really strange column for the Washington Post with a very bizarre assertion about Juan Perón, the populist post-World War II president of Argentina.

It’s en vogue for enraged liberals to compare Trumpism to Argentine Peronism, wielding the analogy as a warning about the potential apocalypse that they fear is about to engulf us. …Like so many familiar historical cliches, however, this one is incomplete, if not downright wrong.

The professor who wrote the piece, Ernesto Semán, wants us to believe Perón is someone to admire, sort of the Argentine version of Bernie Sanders.

…the core of Peronism was a vision that is the exact opposite of Trumpism. Peronism led a process of expanding economic equality, collective organization and political enfranchisement. …Juan Perón presided over a process of massive wealth redistribution on behalf of the emerging working classes. …his government increased its intervention in the economy and provided…free public health care and education for everyone, as well as a wide array of union-managed social services. Peronism enacted strong regulations on private capital… Argentina’s social transformations resembled in some ways those that took place in the United States during the New Deal. Perón certainly thought so…in 1946 quoted entire paragraphs from President Franklin Roosevelt’s second inaugural address.

And he says that today’s Democrats should embrace Perón’s policies.

…comparison of Trumpism to Peronism…ignores how in fundamental ways the two are polar opposites… Instead of fearing Latin American populism, …Democrats should look to it as offering a potential path forward for a more equal and fair country.

Wow. This isn’t quite as bizarre as arguing that Venezuela should be a role model (looking at you, Bernie Sanders, Joe Stiglitz, and others), but it’s close.

Here’s everything you need to know about Peronism, from a 2014 article in the Economist.

The country ranked among the ten richest in the world…its standing as one of the world’s most vibrant economies is a distant memory… Its income per head is now 43% of those same 16 rich economies… As the urban, working-class population swelled, so did the constituency susceptible to Perón’s promise to support industry and strengthen workers’ rights.

Takes a look at this chart from the article showing Argentina’s per-capita GDP relative to other nations. As you can see, the country used to be much richer than Brazil and considerably richer than Japan. And all through the first half of the 20th century, Argentina was not that far behind the United States and other wealthy nations. But then look at the lines starting after Perón came to power in the late 1940s.

In other words, Peronist policies reduced the comparative prosperity of the ordinary people.

Just like similar policies have reduced the comparative prosperity of ordinary people in Venezuela.

What makes these numbers especially powerful is that convergence theory assumes that the gap between rich nations and poor nations should shrink. Yet statist policies are causing the gap to widen.

I put together a chart back in 2011 showing the relative rankings of both Argentina and Hong Kong. As you can see, Argentina used to be one of the world’s richest nations. Indeed, it was the world’s 10th-richest country when Perón took over. And Hong Kong was relatively poor. But look at what’s happened over time. Perón’s statist policies produced a steady decline while Hong Kong’s laissez-faire approach has now made it one of the richest jurisdictions on the planet.

Yet Mr Semán says we should copy Perón. Go figure.

Let’s conclude by circling back to Trump. Semán is upset because some people are equating Trump (who he despises) with Perón (who he admires).

I’m vaguely sympathetic to part of his argument. He’s right that Trump’s version of populism is not the same as Perón’s left-wing version of populism (basically the Bernie Sanders agenda).

But since I care about the less fortunate, I have nothing for disdain for Semán’s assertion that Perón’s policies should be adopted in America.

P.S. Given his remarkable level of  economic illiteracy, you won’t be surprised to learn that Pope Francis was influenced by Peronism.

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